Mortgage lending fell by 2% in September compared to August, and confidence in the housing market is set to fall further as a result of rising unemployment and rampant inflation, according to the Council of Mortgage Lenders (CML).

It said gross lending of £12.9bn in September 2011 was 4% higher than September 2010, when lending totalled £12.4bn, and the third quarter figure of £38.6bn was 15% up on the second quarter of 2011 (£33.5bn) and 2% higher than the third quarter of 2010 (£37.9bn).

However, mortgage lending remains substantially below the levels seen before the recession, and the CML's chief economist Bob Pannell said the small year-on-year September rise came against a backdrop of subdued levels of housing market activity.

He warned that worse was to come for the housing market: "Short-term economic prospects for the UK are not favourable. The housing market is very sensitive to wider household confidence, and this seems likely to weaken over the coming months in response to the latest spike in consumer prices and headline unemployment figures."

Richard Sexton, director of e.surv chartered surveyors, said that with inflation so high the year-on-year rise is "little to celebrate".

"The reality is mortgage lenders are actually retreating from high loan-to-value lending. Their confidence has been further dented by the eurozone economic crises and by the cracks beginning to appear in the government's growth strategy," he said.

"With the supply of credit so restricted, there is almost no scope for them to grow their loan books, so they are understandably playing it safe and focusing on targeting borrowers with big deposits. First-time buyer numbers have fallen to their lowest since November last year, which is a sure sign the mortgage market is struggling."

Howard Archer, chief economist at IHS Global Insight, said he expected house prices to fall by about 5% from their current levels by mid-2012.

The CML figures were published as housing minister Grant Shapps called on lenders to offer fixed mortgages of up to 30 years to encourage greater market stability. Shapps said he wanted consumers to see longer-term fixed mortgages as a "normal and sensible choice".

Longer-term fixed mortgages are far from a new idea. In 2003, the then chancellor Gordon Brown commissioned a report from Professor David Miles on why they were not more popular. The report concluded that part of the reason was that they were too expensive.

Spokeswoman Jackie Lawrence said: "There's definitely demand out there, which is why we've offered longer-term fixed mortgages in the past, but the key is getting the pricing right.

"Customers always look at cheaper two- and five-year deals and ask, 'How much more do I have to pay for a long-term fix?' So if we re-enter the market we have to ask can we be competitive?"

In the Bank of England's Trends in Lending report for October, figures show there was a surge in demand for buy-to-let mortgage loans in the third quarter of the year, stating: "Most major UK lenders reported that demand for buy-to-let lending continued to increase, partly reflecting rising rental yields."

The Bank also said it expected demand for mortgage loans for house purchases to be "broadly unchanged" in the next three months.